By Tom Metz
Myth: The value of a company is intrinsic.
Reality: The value of intangible companies is extrinsic, not intrinsic.
This myth is based on the assumption that a firm?s value is intrinsic, that it is a function of the selling company?s technology and other assets. The reality is that an intangible company does not have intrinsic value. Value is extrinsic, and it exists only in the context to the marketplace. Put another way, the value is simply how much a buyer is willing to pay.
Almost every asset that we own has an intrinsic value: our car, our house, our CD collection. Nonphysical things also have values: a round of golf, a movie, a play, etc. A thing has value if there is a market for those things, and there is a market for most material goods. Craigslist and eBay have created markets for almost everything one can imagine.
The same is not true for a software company, a technology company, or many service companies. A software firm may have spent $10 million developing a specific software application, but if no buyer wants to acquire this software, then the value is zero. The value is what the market is willing to pay.
Intangible companies have a limited number of potential buyers. For intangible companies selling for less than $30 million, there are probably at most five or six companies in the world that are truly good acquirers; 10 at the very most. This is an extremely limited number of buyers. This is not enough buyers to call it a market. There will be no market price. And this is why the value range varies dramatically.
Remember that we are talking about strategic transactions, not financial transactions based on profits. For companies with financial value there are many buyers, particularly private equity groups. Private equity groups, or leveraged buyout (LBO) funds as they were formally called, obtain capital from institutional investors to acquire companies. The number of private equity groups has risen dramatically in the last decade. As a result there might be 200 potential buyers for a financial acquisition.
here is no market for technology companies per se. With only five or six legitimate buyers, a market does not exist. As such, there is no market price. Thus, there is no intrinsic value for intangible companies. Value is solely a function of how much a buyer is willing to pay. [24×7]
Tom Metz has a diverse corporate finance background. He founded T.V. Metz & Co., LLC in 1983 and has been an investment banker for more than 27 years.
Previously he invested venture capital for an investment firm and managed new business projects for the Gramark Co., a private holding company. He held positions in finance with the DeLorean Motor Co. and computer sales with IBM.
Mr. Metz has degrees in Mathematics and Computer Science from the University of Oregon and an MBA from the University of California at Berkeley. He was an Adjunct Professor of Finance at Lewis and Clark College and is a frequent speaker on mergers, acquisitions and entrepreneurial topics.
Tom is an avid heli-skier and squash player. One year he won the U.S. Squash Championships and was the number one ranked squash player in his age group. He also pilots his own airplane, a Cessna 182.
For more info. visit http://www.tvmetz.com/
